Indian corporates' results to remain poor in Q4 FY17; autos revenue to degrow by 46.32%

Though not as bad as expected, India Inc. reported a weak set of numbers for the third quarter of 2016-17.

Fourth quarter results are also going be lacklustre: The aggregate revenue of the BSE 500 companies is expected to fall 5.41% compared to the fourth quarter of 2015-16 or on a year-on-year (y-o-y) basis.

The quarter on-quarter (q-o-q) fall in aggregate revenue— fourth quarter revenue compared to third quarter—is expected to be 2.49%.

Most sectors will report a fall in their top lines Metals, oil and gas, FMCG, and infotech will buck the trend of fall in revenue.

While the aggregate net profit is expected to fall 10.81% y-o-y, it may grow 12.05% q-o-q. This q-o-q jump, however, can’t be treated as a turnaround because performance of the preceding quarter was severely affected by demonetisation.

“Since full remonetisation has happened only in the second half of the fourth quarter, Q4 numbers are also expected to be tepid like the Q3 ones,” says Mayuresh Joshi, Fund Manager, Angel Broking.

The underperformersOne can expect weakness across sectors, with some facing severe pressure. For instance, due to the onslaught from Reliance Jio, telecom companies are facing serious pricing pressure. With customers demanding free calls, free roaming, reduced costs for data, etc., the average revenue per user (ARPU) took a major hit in the last quarter.

Due to massive losses from Idea and Reliance Communication, the telecom industry is expected to report a net loss at the aggregate level. Will the market leader Airtel be able to maintain its profits? “There will be severe pressure on its profitability. Airtel will fall into loss,” says Joshi. Tata Motors is likely to be a drag on the auto sector’s aggregate numbers.However, even after excluding Tata Motors, the situation is not particularly great for the sector. While the two-wheeler segment took a major hit due to demonetisation—Hero Motocorp’s sales volume fell 6% in the fourth quarter—the passenger car segment remained relatively stable—Maruti Suzuki’s volume grew 15% in the fourth quarter. Additional costs due to the phasing out of BS-3 vehicles and their emergency fire sale due to the Supreme Court directive will drag auto companies’ margins in the fourth quarter.

Though the cement sector is slowly recovering from demonetisation and cement volumes picked up due to improved construction activity, prices have fallen because of increased competition. Prices in the southern and eastern markets are now down by 3-4% y-o-y. The sector’s performance will also be affected by the significant surge in pet-coke—an alternative to coal—prices. Exports-oriented sectors such as IT, Pharma, etc. are also expected to be under pressure.

While IT was struggling with H-1B visa issues, pharma has been troubled due to increased notices from the US FDA. The sudden appreciation in the rupee—around 5% in Q4 alone—will squeeze these companies’ margins further. “Fourth quarter of 2016-17 would be the first-ever quarter of PAT (profit after tax) decline for our technology universe,” says Guttam Duggad, Head of Research, MotilalOswal Securities. Infosys, which declared weak results on 13 April, saw its stock price crash by 3.86%.

Metals will shineFourth quarter numbers would have been worse if there was no cyclical upturn in the metals sectors. The steel sector, for instance, is expected to report a net profit of Rs 1,315 crore, compared to Rs 578 crore in the third quarter. It had reported a net loss of Rs 507 crore in the fourth quarter of 2015-16. The non-ferrous metals (other than iron and steel) are also expected to report a y-oy net profit growth of 32%.

Outlook for 2017-18Despite the weak performance in 2016-17, analysts are yet to cut the earnings estimate for 2017-18 in a big way. Industry experts warn that companies will not be able to meet the high expectations. High projections in the beginning of the financial year and reducing them later has been the norm for several years, and it is likely to continue in 2017-18 as well. “The economy was expected to take a deep cut and then recover fast.

Though the expected deep cut did not happen, the bounce back is also not happening as fast as expected. Some structural weakness still remains, so recovery will be more long drawn,” says Arun Gopalan, VP, Research, Systematix Shares and Stocks. Monsoon and implementation of the Goods and Services Tax (GST) are shortterm worries for 2017-18.

Though the Indian Meteorological Department (IMD) is yet to come out with its rainfall estimates, private sector forecaster Skymet Weather has predicted below normal monsoon in 2017. Monsoon continues to have a significant bearing on rural consumption. Implementation of the GST can also create shortterm hiccups, though it will benefit in the long term. “Expect some positive impact of GST in the second half of 2017-18. The full impact will be visible only in 2018-19,” says Gopalan.

While most sectors driven by domestic demand are expected to do reasonably well in 2017-18, telecom will remain under serious pressure—even in 2018-19. With call rates and data rates coming down drastically, ARPUs are going to fall further in 2017-18. Since telcos are laden with debt, their interest costs are also going to be drag. Global sectors like IT and pharma will remain under pressure if the rupee continues to appreciate.